While much of the media punditry focused on the inside-the-beltway political battle, The Australian Financial Review was making a point similar to that of Bob Hawke’s former economic adviser. This budget leaves the federal financial cupboard bare and exposed to any downturn in China.

Like the latter years of the Howard-Costello era, Labor has spent too much of the resources boom’s revenue bubble. Scrambling to repair its tattered credibility, it has now resorted to tax increases to finance all of its projected $6 billion surplus (or a mere 0.4 per cent of GDP) in 2016-17.These include increased taxes on individual income, the 0.5 percentage point increase in the Medicare levy, and wringing more taxes out of a business sector that Mr Swan laments is not coughing up enough, because the stronger dollar has crunched corporate profits.

Increasing income tax is not the way to revive Australia’s productivity performance. It won’t sharpen incentives to work, save and invest. The political system has failed to reprioritise its spending to accommodate new programs within its budget means. Although some measures to improve the “integrity" of the ­corporate tax system may be warranted, this should be part of a thorough review of the tax system that also seeks to lower the 30 per cent corporate tax rate toward the rate applying in ­competitor economies.

Mr Swan’s failure to come to grips with this raises the risks that Australia will be badly caught out by the end of the boom, just as it has mismanaged the budget dynamics of the peak.

Risks are rising

The Financial Review does not suggest that this inevitably will end in tears but fears the risks of it happening are rising and judges it is imprudent not to respond accordingly.

In announcing four years of surpluses in last year’s budget, Mr Swan rightly proclaimed that “a surplus provides our best defence against dramatic changes in the global economy".

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One year on, this has all been forgotten, but the international risks have increased. Professor Garnaut suggests China’s ­economic transformation will soon result in less infrastructure investment and much lower growth in imports of iron ore, other metals and energy. And he warns that investment in our resources sector will also fall from a high of 8 per cent of GDP to the historical average of 2 per cent within a few years.

A surge in export volumes of iron ore, coal and gas can be expected from this massive expansion of capacity. But, just as this investment boom has reshaped the economy over the past decade and driven the dollar to generational highs, so a precipitate bursting of this boom could end two ­decades plus of uninterrupted economic growth. As Professor Garnaut argues, digesting the downside of the mining investment boom may require a sharp real depreciation of the dollar to revive other parts of the economy. That in itself would bring new challenges.

None of this is properly considered by Swan’s sixth budget. The delayed surplus rests on optimistic forecasts. There is no attempt to measure the structural deficit and there is no serious sensitivity analysis of budget volatility inherent in a resources boom economy, even though Labor already has been caught out spending mining taxes that it has failed to collect.

Labor’s political strategy is to ignore its surplus failure, charge ahead with spending and try to wedge the Coalition by demanding that it produce a plan to clean up the mess. But
Tony Abbott
will likely figure that it is neither politically nor economically useful to play this game. Instead, what is needed is a completely fresh look at the ­problem by a government with political authority. This must start with a non-politicised budget review and a thorough audit of the size, scope and efficiency of government. It remains an open question whether Mr Abbott,
Joe Hockey
and their team are up to it, a question the Financial Review is committed to pursuing.